ENTREPRENEURIAL DECISION MAKING ON BASE OF CONSUMER ANALYSIS

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1 IX All-Russian Scientific-Practical Conference with International Participation «СONTEMPORARY PROBLEMS OF REGIONAL ECONOMY MANAGEMENT» May 2012, Saint Petersburg, Russia Faculty of Regional Economy and Management, Saint Petersburg State University of Engineering and Economics Prilukskaja str., 3, Saint Petersburg, Russia, tel , fax ENTREPRENEURIAL DECISION MAKING ON BASE OF CONSUMER ANALYSIS Ieva Andersone 1, Elina Gaile-Sarkane 2, Deniss Sceulovs 3 1 Riga Technical University, 1/7Meza St., Riga, LV-1048, Latvia, ieva.andersone@rtu.lv 2 Riga Technical University, 1/7Meza St., Riga, LV-1048, Latvia, elina.gaile-sarkane@rtu.lv 3 Riga Technical University, 1/7Meza St., Riga, LV-1048, Latvia, deniss.sceulovs@inbox.lv Abstract. Knowledge about consumer needs, factors and motives affecting one s behaviour is one of the ways of ensuring entrepreneurship competitiveness. Relevant information about the consumer obtained in a timely manner enables an enterprise to plan their work on the market more successfully. Authors present the results of the study on the components and factors affecting consumer behaviour from a perspective of entrepreneurial decision making. Factors affecting consumer behaviour in retail have been evaluated in accordance with the model of consumer expectations developed by the authors. Authors present a developed and approbated economically mathematical model of consumer behaviour in retail, which can be used to analyse returns of investments of enterprises, to determine the perspective and less perspective fields of investments. Keywords: Consumer behavior, entrepreneurial decision making, consumer mathematical model, consumer expectancy model. 1. Introduction The global economic crisis has proven that changes of the financial situation in the world directly affect consumption. Statistical data show that 98 % of sectors and companies working in them were affected by the economic crisis. As a result, many companies went bankrupt; many increased the operating efficiency or restructured the operations. Hence, the following assumption was proven true: each company is potentially interested in determining the goods, which the consumer is ready to purchase, for which goods the consumer is ready to spend money at his or her disposal. Objective of the paper: to model consumer behavior in entrepreneurship. Research methodology: Conventional quantitative and qualitative data analysis methods of the economics science and management science have been employed during the preparation of the paper, including mathematical modelling, data grouping, inductive deductive data analysis methods as well as comparative, analytical, and graphical methods have been used in the scientific study. To improve the visual presentation, the authors use tables and figures. The authors believe that it is possible to perform certain work in modelling consumer behaviour and that based on information and telecommunications technologies, consumer behaviour can be modelled and forecasted ever more precisely. In the paper, the authors have developed a mathematical model for evaluating consumer behaviour. 2. Mathematical model The mathematical model is based on the assumption that two groups exist people and goods. Each group is characterised by a range of parameters. Furthermore, if these parameters are fixed within a short time period, they can be measured. For instance, by investing funds in advertising goods (further in the model the parameter is referred to as b 1 ), it can be determined how such investments will affect the consumption of certain goods or group of goods. [1]

2 The mathematical model of consumer behaviour shows that the consumer, when buying certain goods x, with the set of parameters characterising the particular goods (all or a part of parameters) satisfies his or her needs. In other words, the purchasing process can be described as a function of parameters describing the person and the goods, namely, ( ; ). Therefore, the characteristic value can be estimated for all goods to show its value or price that the consumer is ready to pay or does pay for the goods (see equation 1). P f (, ), (1) where: P the price of goods (price of goods or the x value of the specific goods in the specific segment); buyer vector with the typical parameters; vector of goods with its typical parameters. Knowing these parameters, the impact of various variable factors on the consumption volume can be modelled and a decision can be made on whether, for example, the advertising costs must be increased or not. This type of modelling allows managers to take justified and well-considered decisions. In order to express any of the variables, the function must be derived by parameter. The variable parameters of derivation are parameters describing the person and goods, which can be modelled as continuous parameters. In order to facilitate the mathematical modelling process, it can be assumed that the mentioned function is linear. Therefore, a matrix can be developed with parameters characterising goods or services, and this matrix can be denotated with M (see equation 2). M n m i i 1 j 1 a C b ij j where: M the matrix characterising product parameters corresponding to the buyer ; the buyer with characteristic parameters; the goods with characteristic parameters; i the number of buyers; j the amount of goods; C ij parameters of reciprocal interaction of parameters characterising the buyer and goods; 1-n parameters characterising the person, the number of which ranges from 1 to n; 1-m parameters characterising goods, the number of which ranges from 1 to m. (2) When modelling consumer behaviour, it must be assumed that a company s investments to increase the value of parameters of goods (for instance, in advertising) increase the value of a certain parameter x of particular goods in the eyes of a buyer by x+1. In order to estimate the profitability of such investments (profitability gained by a company from investments in the particular parameter), derivation must be implemented taking into account the said parameter (see equation 3). I aicijb j aic, (3) ki bk i j i where: I company s profitability of the particular investment into a parameter of goods; b k the parameter of goods to be analysed; i the number of buyers; j the amount of goods; C ki indicator of interaction of the parameter k characterising the buyer and the goods. The mathematical model developed by the authors can be used also to perform in-depth studies of consumer habits or purchasing habits, for instance, a company can gather information about consumer income, the level of culture, etc. By the use of collected information, a matrix of interaction of parameters can be developed, i.e., to conclude, how an advertising of a specific product or brand by a particular company is affecting persons with small income. When performing derivations according to a specific set of parameters, conclusions can be drawn on how beneficial it is for a company to invest in advertising, in improving the salesperson s performance, the choice of a company s location and other parameters.

3 3. Factors affecting consumer behaviour The bibliographical sources provide various models, which include factors affecting consumer behaviour. In the paper, the author has gathered information available in various bibliographical sources concerning consumer behaviour and factors affecting it. [2] Taking into account the findings of studies performed earlier, the authors concludes that the following factors affect the behaviour of all consumers: social, personal, economic, cultural, situational, psychological, as well as macro-environmental and individual factors. [3] A detailed account of the factors is provided in Table 1. Table 1 Factors affecting consumer behaviour [author s created table, novelty] Factor Example Individual factors Psychological, personal Macroenvironmental Economic, politically-legal, scientific and technological, cultural and social environment, ecology, geography factors Macroenvironmental Direct effect Marketing mix Indirect effect Economic, cultural, social factors Situational factors A person and various situations The impact of these factors on the consumer is not homogeneous, therefore the authors recommends grouping these factors according to the intensity of impact on the process of making a decision on a purchase and to their use in entrepreneurship. Micro-factors can be divided into three groups direct effect and situational factors. The direct effect factors include marketing mix and all types of communication. The indirect effect factors are economic, cultural, and social (a part of social factors can belong also to the direct effect factors).[4] Meanwhile, the factors forming a situation are psychological, personal, and situational (situational factors include particular circumstances of the surrounding environment or optional criteria). The direct effect factors include factors, with which various organisations affect consumer behaviour, normally, they include various marketing tools, the organisations are trying to affect consumer behaviour with various manipulations, by successfully employing the elements of marketing mix, using effective communication methods, etc. Indirect effect factors include factors characteristic for each individual. With the help of these factors, it is possible to segment the market; these factors are as follows: economic, cultural, and social factors.[5] Such situational factors can be isolated, which strongly affect the decision-making process, which is the final stage of buyer behaviour. The situation factors are various situations, in which a person finds himself or herself, including the way of how these factors can affect the person s behaviour. 4. Consumer expectation theory Scientific and practical literature sources include a great number of theories and practical advice regarding motivation. Oftentimes, motivation is believed to be manipulation, therefore, the concept motivation is not always perceived from a positive standpoint.[6] All the while, scientific literature provides extensive writings on the so-called expectations theory, which precisely could be interpreted as the theory of expectations of motivation results. In the research, the author develops an expectation theory, which can be used to analyse and assess consumer behaviour in the market. At the base of the expectations theory is the assumption that people's needs are not the only cause for possible motivation of a person (stimulation to behave in a certain way). The expectations theory looks at how people are motivated to behave or how they can be motivated to perform certain activity, as a result of which value is created.[7,8] The authors divides the initial nine parts of the Expectations Theory Model into four stages (see Fig. 1). In the first stage, the expected consumption value is included and it normally includes functional, economic, and social gains, as well as the possible social value of the purchase is evaluated according to the specific social layer and prior experience. This stage can be referred to as the expected result stage. In the second stage, the process of obtaining the goods is evaluated, by determining how much information must be sought, how a decision must be made on the purchase of goods, what roles affect the decision-making process. This phase corresponds to the wide-spread theory (model) of decision making described in a range of sources. The third stage is the purchasing process, in which a major role is attributed to the salesperson, physical contact, and other factors affecting the purchasing process. Many well-known marketing specialists have written about the factors affecting the purchase process. The said factors are grouped according to their field of

4 influence. The authors have also grouped these factors and recommends dividing them into three groups: direct effect, indirect effect, and situational factors. It must be concluded that this stage could be theoretically referred to also as the purchase stage.[9] RESULT PRE-PURCHASE STAGE PURCHASE STAGE SATISFACTION I II III IV 1. Expected consumption value 4. Abilities and features 8. Understood fair reward 3. Acquisition of goods 6. Performa nce (completi on) 7.A Significant rewards 9. Satisfaction 2. Effort perceived assessment of social value 5. Perception of role 7.B Insignificant rewards Figure 1. Consumer s expectation model [authors created figure, novelty] In the last, the fourth stage, customer satisfaction occurs. Satisfaction can occur only if the consumer has gone through all of the afore-mentioned stages. In this stage, if the consumer is satisfied with the purchase, trust towards the brand, product, or company takes shape. It is particularly important in case of a service. Upon summarising the aforementioned information, the author concludes that the fourth stage can be referred to as the stage of satisfaction of desires. With the developed model of consumer expectations theory, one can analyse, how a person behaves to take a decision on the desirable result and how he or she can be affected. The developed Expectations Model is approbated in practice. The main conclusion is that the developed expectations theory model works only in retail and, as the trade structure changes, especially as electronic trading is developing, The level of involvement of buyers can diminish, therefore, this model cannot be directly applied to e-commerce. 5. The decision making model in entrepreneurship Since a great volume of data is necessary for modelling, then each company, which plans to perform modelling, must be able to ensure all the necessary information about clients and their consumption habits. That, for its part, means that a company must perform regular market and consumer opinion studies. Upon summarising the aforementioned information, it must be concluded that the model developed by the authors is useful in entrepreneurship to analyse a company s return on investments, to determine the perspective and less perspective fields of investments, to plan advertising communications, etc. All models can be used each separately, thus increasing the company s operating effectiveness in trade. However, the authors believe that the greatest overall effectiveness can be achieved if retail companies used advantages offered by all developed models. In order to demonstrate, how the developed models can be effectively used, the authors suggest choosing the following approach (see Fig. 2): To perform sector analysis by using the author s developed model for assessing the parameters affecting consumer behaviour. By using this model, it can be determined, which of these factors dominate in decision-making and how, as the investments change, consumer behaviour changes (i.e. sales volume will increase).

5 Afterwards, the authors suggest performing an analysis of the company s assortment, using classification of goods according to the consumers needs. The needs corresponding to each segment, age group, and group of goods can be determined, and this information can be used when positioning the goods or services in the consumer market or when performing other activity directed at strengthening or increasing demand. The third step, as suggested by the authors, is using the model of consumer expectations theory and based on consumer expectations, the understood fair reward and insignificant rewards, to develop direct impact factors, including improving the salespersons performance at the shop and paying increased attention to the arrangement of the commercial premises. In accordance with the authors proposed approach, after obtaining and summarising modelling information, the company s marketing strategy must be defined and marketing measures must be planned. After the marketing measures, it is recommended to determine effectiveness of measures and therewith also the effectiveness of the use of models. As one of the important components in implementing any marketing campaign is client servicing at the point of sales, the author recommends paying particular attention to this stage. The use of models prepared by the authors in sales, entrepreneurship, and other sectors of economy provide an opportunity to reasonably plan investments for the relevant time period, to avoid mistakes, and to improve the overall economic effectiveness of the company s operations and usefulness of resource utilisation. The use of models simultaneously ensures an increase in the trading volume and minimisation of a company s costs. Defining the study problem Defining the aims and mission of a company Study planning, information collection Mathematical modelling of consumer behaviour Identifying the most important factors affecting consumer behaviour, investment planning Demand forecasting Identifying consumer segments, creation of positioning strategy Use of Consumer Expectancy theory Identifying direct factors affecting the sales / determining the sales strategy Development of marketing strategies (including advertising and sales strategy) Marketing planning (short-term and long-term plans) 6. Conclusion Evaluation of effectiveness of marketing measures and control of results Figure 2. The decision-making model in entrepreneurship, based on practical applicability of consumer behaviour models developed by the author [authors created figure, novelty] To make in-depth studies of consumer habits or purchasing habits and to make economically reasonable decisions, it is recommended that entrepreneurs working in the retail sector use mathematical modelling of consumer behaviour. By preparing the matrix of interaction among parameters, i.e. by determining how people having different income levels are affected by a product advertisement or brand of the specific company, it can

6 be determined, how profitable it is for a company to make investments in advertising, in improving the salespersons performance, in choosing the company s location, and other parameters. The authors suggest using the developed model in entrepreneurship to analyse the return on investments, to determine the perspective and less perspective spheres of investments; For making decisions at a retail company and for long-term strategic development planning, the authors suggests using the entire set of models described and developed in the paper, which would ensure logical and well-grounded decision-making within the specific territory. Timely and well-grounded use of the developed models would ensure sustainable development of companies in Latvia. References 1. Gaile-Sarkane E., Andersone I. (2011) Modeling of Consumer Behavior for Business Sophistication. The 15th World Multi-Conference on Systemics, Cybernetics and Informatics, July, 2011, Orlando, Florida, USA, 82-87p. 2. Praude V. (2011) Mārketings (teorija un prakse) 1.grāmata, 3.izd. R: Burtene, lpp. ISBN Andersone I., Gaile-Sarkane E.(2008) Influence of factors on consumer behavior. The 5th International Scientific Conference Business and Management 2008, Selected papers, Vilnius, Lithuania, May 16-17, 2008, p. 4. Blackwell R.D., Miniard P.N., Engel J.F.(2001) Consumer Behavior. 9.Auflage, FortWorth S Kotler, Ph., Keller, K.L., Bradly, M., Goodman, M., Hansen, T. (2009) Marketing management. Pearson Prentice Hall: 1st. European ed. 889p. 6. Kreitner R., Kimicki A.(1998), Organizational Behavior. IRWIN Mc Graw-Hill, 670p. ISBN , p 7. Moorhead G., Ricky W. Griffin (1998) Organizational Behavior.Managing people and organizations. Houghton Mifflin Company, 622p. ISBN Stephen P.Robbins (2001) Organizational Behavior 9th ed. PrenticeHall,643p.ISBN Gaile-Sarkane E., Andersone I. (2011) Modeling of Consumer Behavior: Consumer Expectancy Theory for Retail. International Conference on Social Sciences and Society (ICSSS 2011), October 14-15, Shanghai, China, 2011, p.

Consumer behavior changing: methods of evaluation

Consumer behavior changing: methods of evaluation Asoc. Prof. Elīna Gaile-Sarkane, Dr.oec., Lecturer Ieva Andersone, Mg.oec. Riga Technical University, 1 Kalku Str., Riga, Latvia, LV 1658, e-mail:e.gaile-sarkane@rtu.lv,